UBS turns bullish on Domain Holdings Australia Ltd after its share price crash

The broker has upgraded the stock by two full notches to "buy" from "sell" after Domain Holdings Australia Ltd (ASX: DHG) lost more than 17% of its value on Monday. Here's why…

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It might be hard to see but yesterday's close to 20% plunge in the share price of Domain Holdings Australia Ltd (ASX: DHG) has a silver lining.

The big drop in value for Australia's second largest online property classifieds business has prompted UBS to take the bold step to upgrade the stock by two full notches to "buy" from "sell" as the broker believes the panic sell-off following the shock resignation of its chief executive Antony Catalano is an overreaction.

You can't blame shareholders for imagining the worse though as Mr Catalano is seen as the instrumental part of Domain's growth and has the key relationships with property agents who advertise on the site. This is a loss for shareholders and casts a long shadow over the earnings growth outlook for the group.

However, Domain's better than expected first half update should give some measure of reassurance to investors that the business is on a good footing and UBS points out that Domain is now trading on a similar 35 times price-earnings (P/E) multiple for FY18 to the more mature market leader REA Group Limited (ASX: REA), even though consensus growth forecast for Domain is higher than REA.

On an enterprise value to earnings before interest tax, depreciation and amortisation (EV/EBITDA) basis, Domain looks even better with the stock trading at around a 20% discount to REA.

There are three things investors will need to keep a close eye on though, according to UBS.

  • Queensland: Audience metrics for Domain is still lagging REA in that state and Domain will need to better leverage its sales/agent relationships to catch up.
  • Commercial: Domain also lags REA in commercial property listings with the number of leads and audience weaker than its archrival. Domain will need to invest more in building this business and that will have an impact on margins.
  • Corporate transactions: UBS notes that the Review Property acquisition is yet to close and the plunge in Domain's share price will have a greater than expected earnings per share impact as the company will be using its scrip to consummate the deal.

Nonetheless, the bad news seems to be more than reflected in the current share price, said UBS. The broker has a $3.20 share price target on the stock and is forecasting a 1.9% net yield on Domain for FY19.

Shareholders in Fairfax Media Limited (ASX: FXJ) will also be hoping that UBS is right after its share price also suffered a big sell-off on Monday. Fairfax owns about 60% of Domain.

Domain and REA are regarded as "disruptors" to the traditional real estate advertising market but there are other disruptors in other industries that are well placed to outperform in 2018.

The experts at the Motley Fool have uncovered three that should be on your radar this year and you can find out what these stocks are in the free report that is available via the link below.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »